Cutting off some Russian banks’ access to SWIFT, the messaging network at the heart of the global movement for money, could be a highly effective punishment for President Vladimir Putin’s invasion of Ukraine. But it would give other geopolitical rivals, notably China, an excuse to promote digital versions of their own central banks’ money in global trade and finance. This could weaken the global influence of the dollar. The pillars of US economic hegemony are SWIFT, CHIPS and its dollar. Arming any one of them against Russia’s banking would make China believe it needed an alternative to that trifecta to escape the fringes of American power.
Based in Brussels but with a data center in Virginia, the cooperatively owned Society for Worldwide Interbank Financial Telecommunication (SWIFT) System is a ‘financial panopticon’ that allows Washington to survey cross-border fund flows. However, the actual policing is often done in New York, where 95% of the world’s dollar payments are settled irrevocably.
Clearing House Interbank Payment System (CHIPS) is a private club of financial institutions. Its 43 members settle claims worth $1.8 trillion daily using a pre-funded account with the US Federal Reserve. They maintain all US offices and are subject to US law. Members of CHIPS such as BNP Paribas, Standard Chartered and others have paid millions of dollars in fines over nearly two decades of Iran-related sanctions violations that are not worth nearly $13 billion. As a tool of American power, the chips did not go unnoticed in Beijing. In a Canadian court battle to block the extradition of Huawei’s finance chief Meng Wanzhou to the US, the Chinese firm has questioned HSBC’s decision to process $100 million of the Skycom transaction in New York. Huawei argued that since HSBC was aware of its ties with Skycom, a Hong Kong-based partner that sold equipment in Iran, the bank should have routed the funds through a smaller offshore dollar-clearing system in Hong Kong. , to avoid putting money on American soil. ,
To do away with the chips gamble, China has created its own cross-border Interbank Payment System (CIPS), which settles international claims in yuan and could potentially run its own messaging network (since 2016, it has used SWIFT). has been used). CIPS has grown rapidly. But as long as 40% of the world’s international payments are in dollars, a clearing facility for the yuan, which accounts for 3%, cannot replace chips. This is where the e-CNY, the digital yuan being tested, enters the picture. According to a white paper released by China’s central bank, the token is “technically ready” for cross-border use, although it is “currently designed primarily for domestic retail payments.” That can change. If a Chinese company or individual is faced with the threat of not being able to send money overseas because the chips will not approve the payment or carry SWIFT instructions, an intermediary in a friendly country is always required to accept e-CNY. , and forward the one dollar stablecoin payment to the foreign counterparty of the Chinese buyer.
The intermediary faces no credit risk as it operates in sovereign cash backed by taxpayers from the world’s second largest economy. Nor would any compromise risk. The blockchain will make all transactions ‘atomic’, meaning money will be exchanged hands – in the form of tokens – without exposing any counterparty to a limbo where they parted with something of value without obtaining consent. Was. If the Chinese buyer does not have a valid yuan to spend, the seller will not receive payment; Go-Beach won’t be out of pocket. And to convert your digital yuan back to dollars—or a stablecoin like Tether or USD Coin that mimics the U.S. dollar—the middleman only needs to make people in the rest of the world buy Chinese goods and assets that require them. To send e-CNY.
SWIFT will not see the transaction and CHIPS will not have to clear it. In fact, there may not be a need for a western bank to transfer money across borders. Even if the US prevents stablecoin companies from doing business with Chinese residents, it will not prevent entities in third countries from buying Dollar tokens on crypto exchanges to pay US-regulated businesses. The scope of American economic dominance could shrink – not in a year or two, but perhaps in a decade or more.
And that’s probably the greatest thing about the dominant power. It is unmatched as long as the consequences of its coercive use—collapsed banking systems, tanking national currencies, shaming stock markets—are left to the imagination of potential targets. But when the muscle is actually flexed, the long-term outcome can be unpredictable: it can either frighten future competitors or encourage their search for an alternative. Can e-CNY be the latter? Beijing may not know the answer, but after Russia’s semi-expulsion from Swift, it might want to find out.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services
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